2004 (1) TMI 644 - HC - VAT and Sales Tax

Constitutional validity of the U.P. Tax on Entry of Goods Act, 2000 ( the Act ) - violation of articles 301 and 304 of the Constitution of India - Government of India undertaking - HELD THAT - In our opinion a tax to be a compensatory tax must be in the nature of a cess. A cess is a tax imposed for realising revenue which is utilised for a specific purpose. Thus, while a cess is also a tax, it is a tax of a special nature. It does not realise revenue which is used for general public expenditure but for specific expenditure for a specific purpose. For example, education cess would be a tax which generates revenue which is utilised for education purposes, e.g., school buildings, paying salaries to teachers, etc. We have carefully perused the impugned Act. It consists of only nine sections. There is no provision anywhere in the Act stating for what purpose the revenue raised by it will be utilised. There is also no provision therein stating that the revenue raised by it will be used for facilitating trade and commerce. Hence, the amounts realised under the impugned Act can be used for any purpose. Hence, in our opinion it is not a compensatory tax. It may be noted that article 301 states that it is subject to the other provisions of Part XIII. Hence, it is not subject to article 246 as article 246 is in Part XI of the Constitution. Hence, power to legislate under article 246 of the Constitution has to be read as subject to article 301 of the Constitution. It follows that the State Legislature cannot make a law which violates article 301 of the Constitution. Hence, the scope of the legislative field contained in entry 52, List II of the Seventh Schedule has to be restricted and treated as subject to article 301 and other articles in the main body of the Constitution. There is nothing to show that the President of India has given previous sanction to the Bill in connection with the impugned Act and all we can gather from the letter dated 19th January, 2000 is that the Government of India has no objection to the introduction of the U.P. Tax on Entry of Goods Bill, 2000 in the State Legislature. To our mind this does not meet the specific requirement of the proviso to article 304(b) of the Constitution. There is not even a mention of the President of India in the aforesaid letter dated January 19, 2000. The said letter does not state that it has been issued under the authority of the President of India, and hence we have to conclude that no previous sanction was given by the President of India to the Bill in connection with the impugned Act. No doubt article 255 of the Constitution validates an action even if the sanction was subsequently given by the President of India, but in the present case there is no averment that even subsequently the President gave assent. However, even assuming that the President of India has given sanction under the proviso to article 304(b) we are of the opinion that that alone would not satisfy the requirement of article 304(b) of the Constitution. It may be noticed that article 304(b) requires that the restriction on freedom of trade, commerce and inter-course should be reasonable and in the public interest. Hence, even if the President of India has given previous sanction under the proviso to article 304(b), the petitioner has further to establish that the restriction on the freedom of trade, commerce and inter-course are (i) reasonable and (ii) in the public interest. We are of the opinion that the restrictions imposed by the impugned Act are not reasonable and they are not in the public interest as they would hamper the progress and development of the national economy. Article 304(a) again gives further emphasis to article 301 providing for the economic unity of India. Thus, the whole scheme in articles 301 to 304 show that the founding fathers in their wisdom have repeatedly emphasised in these articles that India is one economic unit and different States are not separate economic entities. No doubt invalidating the tax would affect the revenue of the State of U.P., but the nation is larger than the State. We have to first look at the interest of India, and place it above the interest of the State of U.P. However, it may be mentioned, as pointed out in para 8 of the supplementary rejoinder affidavit filed in reply to the supplementary counter-affidavit of Shri B.P. Sonkar, the State Government is getting its share from the excise duty, Central sales tax, etc. from the Central Government apart from getting substantial revenue from the petitioners towards U.P. trade tax (sales tax). In para 6 of that affidavit it is mentioned that no facility whatsoever has been provided by the U.P. Government to Mathura Refinery for transportation of crude oil from outside U.P., which in fact is done by underground pipes built by the petitioner itself. By the notification dated June 18, 2001 exemption has been granted from payment of entry tax by the State Government to the petitioner-company being a 100 per cent export oriented unit, and the dispute is hence confined prior to June 18, 2001. Even by the subsequent notification dated February 18, 2003 machinery being imported for the purposes of installing it in the factory has been exempted and hence no entry tax is being levied even on those unit which are not 100 per cent export oriented unit on the import of machinery with effect from February 18, 2003. Thus, this petition and all the connected/similar petitions are allowed. The impugned Act is declared violative of articles 301 and 304 of the Constitution and is hence ultra vires.

Summary

Issues Involved:
1. Constitutional validity of the U.P. Tax on Entry of Goods Act, 2000.
2. Whether the impugned entry tax is compensatory in nature.
3. Compliance with Article 304(b) of the Constitution.
4. Impact on trade, commerce, and inter-course under Article 301 of the Constitution.

Summary:

1. Constitutional Validity of the U.P. Tax on Entry of Goods Act, 2000:
The petitioners challenged the constitutional validity of the U.P. Tax on Entry of Goods Act, 2000, arguing it violated Articles 301 and 304 of the Constitution of India. The court focused on the constitutional issues, particularly the Act's compliance with Articles 301 and 304.

2. Compensatory Nature of the Entry Tax:
The court examined whether the entry tax was compensatory. It referred to the definition of compensatory taxes as those facilitating trade by providing facilities like roads. The court noted that the respondents failed to establish a broad correlation between the revenue generated by the entry tax and the expenditure on facilities for trade and commerce. The court concluded that the impugned tax was not compensatory in nature as it was used for general revenue purposes rather than specifically facilitating trade and commerce.

3. Compliance with Article 304(b) of the Constitution:
The court analyzed whether the impugned Act complied with Article 304(b), which requires the President's previous sanction and that the restrictions imposed by the Act be reasonable and in the public interest. The court found no evidence of the President's previous sanction and concluded that the restrictions imposed by the Act were neither reasonable nor in the public interest. The Act was deemed to hamper the progress and development of the national economy.

4. Impact on Trade, Commerce, and Inter-course under Article 301:
The court emphasized that Article 301 ensures the free flow of trade, commerce, and inter-course throughout India, treating the country as one economic unit. The impugned Act was found to violate Article 301 as it imposed restrictions on the free movement of goods, thereby hampering the growth of modern industry. The court highlighted the importance of economic unity for the political unity of the nation.

Conclusion:
The court declared the U.P. Tax on Entry of Goods Act, 2000, violative of Articles 301 and 304 of the Constitution and hence ultra vires. The petitioners were entitled to a refund of the amounts collected under the Act with 10% interest per annum, provided the burden of the tax had not been passed on to consumers, to avoid unjust enrichment. The petitions were allowed.